Five obstacles the São Paulo government will face to privatize Sabesp

By Luisa Purchio

One of the main flags of the governor of the state of São Paulo, Tarcísio de Freitas, is the privatization of Sabesp, raised with conviction at the end of last year, even before he took office on January 1.

Although considered the “crown jewel” of the state’s privatizations, Freire’s mission will not be simple. Sabesp is the fourth largest water company in the world in terms of population served.

The opposition to the São Paulo governor has already manifested that it will do everything to impede the privatization, especially in the Legislative branch.

Municipalities that feel aggrieved, as well as the union of workers who work in the state company, are moving to prevent it.

Even so, Freitas kicked off the beginning of the procedure.

In early March, the government announced it would hire the World Bank to study the feasibility of privatizing the sanitation company.

According to the Secretary of Investment Partnerships, the public notice will be launched after the technical studies analyzing issues such as the tariffs charged after privatization and whether it will be possible to meet the requirements demanded by the sanitation framework before the deadline.

“The State Government will only move forward with the proposal if it brings benefits such as the universalization of water and sewage services, expected by 2033, as well as improvements in efficiency by minimizing losses and waste that today are around 27% (2020), thus reducing costs and burdens to the population.”

“In the studies, alternatives for issues such as municipal contracts are already foreseen.”

“The government reaffirms that the goal is to achieve the total water and sewage supply at fair prices and ensure water security for the entire state,” said the secretariat.

The São Paulo government must enter five main obstacles in privatizing Sabesp.

1. OPPOSITION FROM THE MUNICIPALITIES

One of the main obstacles to the privatization of Sabesp will be the opposition of the municipalities with contracts with the company, from the largest to the smallest.

This is because the most significant contracts, such as that of the city of São Paulo, for example, due to their importance and high value, have a clause that conditions the change of shareholder control of the company to the cancellation of the contract.

In cases like this, the government will have to negotiate with the respective municipality to avoid the cancellation of the service provision.

José Antonio Faggian, president of the Union of Water, Sewage and Environment Workers of the State of São Paulo (Sintaema), is against privatization.

According to him, small municipalities in the state’s interior oppose control by the private initiative because they are financially deficient and believe that Sabesp will not maintain the same level of investment in these cities if privatized.

“Sabesp just did a project that cost R$2 million in a city of 4,000 inhabitants.”

“The private sector is not going to do something like this. The small municipalities are afraid”, he says.

He is traveling through the state’s interior and says that in the region of Presidente Prudente, Tupã, and Adamantina, the feeling is of concern and against privatization.

2. RISK OF FARE INCREASE

Among the opposing arguments, Sintaema’s president says that “there are more than 200 cases of privatization worldwide in the sanitation sector, in places like Paris, Berlin, and Buenos Aires, because the tariffs increased and the quality of service worsened after privatization.

In addition, Faggian defends that “there is no reasonable justification to privatize Sabesp, since of the 375 municipalities in which it operates, 309 already have 100% of sewage collection, 100% of water supply, and 100% of treated sewage.

According to him, the other 66 municipalities are within the investment plan to have universalization before 2033, the deadline required by the sanitation framework.

“It is a company that is well evaluated by the population and that, for more than 20 years, has not taken a single real from the state coffers; on the contrary, it pays dividends of around R$500 million a year.”

“This resource is reinvested in the 645 municipalities of the state,” he says.

Despite the arguments against it, in February, governor Tarcísio de Freitas stated that he would go ahead with the privatization of Sabesp if the studies proved that there would be a reduction in the tariffs charged to the consumer.

“The argument that privatization will increase the tariff is false.”

“We will not privatize to make citizens pay more for water.”

“We are going to study to be sure that the water will reach where it doesn’t and the tariff will fall,” said Tarcisio then.

3. PARLIAMENTARY FRONT AGAINST THE PRIVATIZATION OF SABESP IN ALESP

Another obstacle to the privatization of Sabesp is the opposition, led by leftist parties, in the Legislative Assembly of the State of São Paulo (Alesp).

Called “Parliamentary Front against the Privatization of Sabesp”, the group gathers more than 20 representatives from PT, PCdoB, Pol, and Rede, together with unions and representatives from CUT and CTB.

Although the government has a large majority in the House, there is a particular fear that there may be dissent among supporters.

It is worth remembering, however, that the president of Alesp, André do Prado, is an ally of the state executive and an asset for his good relationship with politicians from other parties.

4. COMPLEXITY OF THE OPERATION

For Fernando Ferri, from the investment analysis company Empiricus, the size of Sabesp may be a factor that will hinder the privatization due to the company’s complexity.

“Every privatization has a level of operation complexity, design of the model, and public acceptance. Eletrobras, for example, took a long time and had strategic assets that needed to be left out,” he says.

Ferri reminds us that Sabesp is a more straightforward process than Eletrobras because the assets are concentrated in the state of São Paulo. Still, even so, it is an operation full of difficulties.

“There are tens of thousands of employees, stations, and substations.”

“Besides, all public companies end up having hidden skeletons, that is, doubtful investments”, he analyzes.

5. SPECULATIVE MARKET

Ferri affirms that the financial market does not believe in the speed with which the company privatization will be done.

Proof of this is the value that Sabesp shares are being traded on the stock exchange.

Based on a type of valuation that considers the firm’s value divided by the regulatory asset base, its trading value should be above R$87 per share to be regarded as a well-managed company.

However, the value per share is trading close to R$51, a relative level very similar to the value traded at the worst moment of the water crisis faced by the company.

In this devaluation, it is necessary to consider the high Selic rate and the general risk aversion scenario in the stock market. Still, its low value is suitable for evaluating investors’ interests.

“There is a disbelief that it will be privatized quickly and, because of this risk, investors prefer to allocate in other papers,” says Ferri.

FACTORS FAVORABLE TO THE PRIVATIZATION OF SABESP

Despite the obstacles, other factors favor the privatization of Sabesp.

The new sanitation framework, for example, opened doors to unlock private investment in the sector throughout the country.

“There are half a trillion reais of investments needed until 2033 to universalize all the sanitation services required by law in Brazil.”

“That is a lot of money, and there is already a need for capital allocation,” says Diogo Mac Cord, former Secretary of Privatization in the Bolsonaro government and current partner and leader of Infrastructure and Regulated Markets for Latin America at EY.

Regarding the privatization of Sabesp, Mac Cord says there are still questions to be answered.

“The first is: will there be grants available for the service holders, the municipalities?”

“What does the state government intend to do with the funds raised?”

“There is no information about this yet, but we know that Freitas is very skilled and has enormous experience in concessions and privatization.”

“I imagine that the design leads to the alignment of incentives, which in turn leads to the possibility of privatization,” he points out.

For Gesner Oliveira, coordinator of the Center for Studies in Infrastructure and Environmental Solutions of the Getúlio Vargas Foundation (FGV) and former president of Sabesp, “any privatization is a process that requires transparency, evaluation of assets and modeling.”

“It is natural that there is extensive technical work for the privatization of Sabesp”.

Gesner evaluates that Sabesp is one of the most attractive companies in the sanitation sector, mainly due to its large number of contracts with municipalities.

“It has a strong performance base and approximately 370 contracts in 370 municipalities.”

“It has a great investment capacity, vast experience, and a very good governance standard, and its shares are also traded in New York.”

“All this makes it a well-regarded and well-valued company. In the hands of the private sector, it could be even better and have more agility,” he believes.

With information from Gazeta do Povo